Corresponding Adjustment, Anti Double Taxation that the Authority Ignored

Tax disputes are almost always brought on by the findings of further testing of transfer pricing of affiliated companies or inter-business groups, in the form of secondary adjustment. In addition, this practice has the potential to cause double taxation.

For information, a secondary adjustment is a further correction of a primary adjustment or initial test conducted by the tax authority on transfer pricing in an affiliated transaction.

The provisions regarding secondary adjustment have been stipulated in the Minister of Finance Regulation (PMK) Number. 22/PMK.03/2020. In addition, recently this was also reaffirmed in Article 36 paragraph (6) of Government Regulation (PP) Number 55 of 2022.

Read: Confirmation of Secondary Transfer Pricing Adjustment as Dividend

In conducting the adjustment, DGT determines the amount of the difference between the transfer price and the selling price or fair profit and is categorized as a constructive dividend.

Thus, the final result of the secondary adjustment that absolutely determines the difference between the transfer price and the fair value or fair profit, as an indirect dividend payment, has the potential to harm taxpayers.

In the end, taxpayers will file an objection and if the objection is not granted, the dispute will continue in the tax court. There are several reasons why taxpayers object to the determination of transfer price differences as constructive dividends.

First, taxpayers feel that the difference is not a dividend payment. The argument is that dividends by definition are payments made to shareholders as part of the profits received by the company.

Read: Secondary Adjustment, New Uncertainty, and Potential for Double Taxation

So, it would be inappropriate if affiliated transactions were declared dividends, even though they were not bound by an ownership relationship or even carried out with an independent party. In fact, even though the transaction is made to shareholders, it does not mean that the correction to the transfer price is determined as a dividend.

Double Taxation

Second, dividend payments are the object of Income Tax Article 26, which is imposed by withholding tax and is final.

Third, if an institution is considered to pay dividends, then there are other parties who should be considered as dividend recipients.

However, in the context of secondary adjustment, the imposition of Income Tax Article 26 only applies to the company being audited. DGT, often does not make the same correction to the counterparty of the transfer price transaction. Especially if the company is not located in Indonesia or foreign taxpayers.

In fact, the withholding of Income Tax Article 26 should be a tax credit for the counterparty. Now, because this correction is not made to the counterparty, it will lead to double taxation.

However, be aware that this risk of double taxation can occur not only in cross-border or jurisdictional transactions but also in domestic transfer price corrections.

Read: Understanding Three New Transfer Pricing Methods in Government Regulation Number 55 of 2022

Not only that, the determination of Income Tax Article 26 payable can also have other implications, namely the imposition of administrative sanctions if not immediately implemented by taxpayers. Thus, the tax burden that must be borne becomes greater.

About Corresponding Adjustment

To minimize the imposition of double taxation, the tax authority actually has the option to carry out the corresponding adjustment procedure. It is an adjustment to the advanced transfer price, after the secondary adjustment by involving the counterparty. Unfortunately, this option is often not considered by tax authorities in Indonesia.

By definition, a corresponding adjustment is an adjustment of the taxable income of a taxpayer in a country or jurisdiction by the tax authority of that country or jurisdiction. The adjustment is made due to transfer pricing corrections made by the tax authorities of other countries or jurisdictions (primary adjustment).

This is done so that the allocation of income in the two countries or jurisdictions is consistent, with the aim of eliminating double taxation. The question is, why doesn't the authority use the corresponding adjustment, as a tool that can prevent taxpayers from being subjected to double taxation?

In-depth Evaluation

Before going that far, we should conduct a more in-depth evaluation and analysis of the transfer pricing adjustment procedure in Indonesia as a whole. Not only on the use of the corresponding adjustment.

We can start with the implementation of primary adjustment and secondary adjustment. Whether the current policy is appropriate or not.

For example, the establishment of a constructive dividend is the final result of the secondary adjustment process. In some countries, a constructive dividend will only be applied if it is also applied to the counterparty.

Meanwhile, in several other countries, secondary adjustment is carried out through repatriation, provided that it has an underlying transaction. For example, if it is considered a dividend, it must be clear that the dividend payment occurred and who received it.

In conclusion, we all understand that making corrections and adjustments to transfer prices is the right of the tax authority. However, the government is expected to be more prudent in reviewing the practice in the field and the global best practice.

Therefore, corrections made to transfer pricing by companies do not become an additional burden that has a negative impact on taxpayers. (ASP/KEN)

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.